ATLANTA and JACKSONVILLE, Florida—Once again, the resiliency of the people of Puerto Rico is being tested, this time by the September 2017 landfalls of Hurricanes Irma and Maria.

In recent years, Puerto Rico has lost population and employment due to U.S. tax restructuring, resulting in high debt issuance and eventual bankruptcy. The island’s problems were exacerbated by the emergence of the Zika virus in 2015-2016, and the effects of the outbreak are still being felt.

Through it all, the leisure and hospitality sector has been a bright spot for the island economy. This article examines the Puerto Rico economy, historic catastrophic hurricane effects, and the impacts of the one-two punch of Hurricanes Irma and Maria on the Puerto Rican hospitality sector.

Economic backgroundHistorically, Puerto Rico has had one the most dynamic economies in the Caribbean region as the once thriving agricultural sector was surpassed by the industrial sector as the primary driver of economic activity and income.

Favorable tax treatment fueled investment in Puerto Rican municipal bonds as the government replaced declining tax revenue with debt—which later ballooned to $74 billion—that resulted in an economy with unsustainable borrowing. Puerto Rico’s status as a U.S. territory hindered its ability to deal with the debt crisis, and it defaulted on its obligations. In May 2017, Puerto Rico officially declared bankruptcy, the largest public bankruptcy in U.S. history.

An island of roughly 3.4 million citizens, Puerto Rico lost population at an annual average rate of 1.5% from 2010 to 2016, losing 314,800 citizens. Job losses over the past six years have amounted to 40,300, a compound annual loss of 0.7%. Prior to the hurricanes, the unemployment rate in August 2017 was 10.1% compared to 4.4% in mainland U.S.

The fragile and outdated infrastructure on the island was significantly damaged by Hurricanes Irma and Maria, with losses likely to exceed $90 billion. The debt crisis, rising unemployment, impacts of Hurricane Maria and net migration losses are cause for concern for the citizens of Puerto Rico. A recent report by the Center for Puerto Rican Studies predicts between 114,000 and 213,000 Puerto Ricans will leave the island annually from 2017 to 2019.

Puerto Rico’s hotel industry footprintFrom 2010 to 2016, Puerto Rico’s leisure and hospitality industry was the one economic bright spot, adding approximately 9,700 jobs, or 2.2% compounded annual growth. An additional 300 jobs were added through September of 2017. According to the Puerto Rico Tourism Company, the island attracted 5.1 million tourists in 2016 and visitor expenditures totaled nearly $4 billion, generating 3.7 million roomnights. Visitation hit a 10-year high in 2008 at 5.2 million then bottomed out at 4.2 million visitors in 2012.

Figure 1 details the Puerto Rican hotel market performance from 2000 through 2016. Disruptions in the mainland U.S. economy clearly had a substantial impact, though the subsequent recovery was remarkably strong, particularly in view of Puerto Rico’s challenges.

The unravelling of the debt crisis and Zika virus in 2015 and 2016 were island-centric—although Zika was a concern on other Caribbean islands and in south Florida. Mainland U.S. travel demand was strong, but these concerns kept some tourists from traveling to Puerto Rico. Demand remained soft in the first few months of 2017 but strengthened through August until both storms hit in September 2017. Since August 2017, about 2,944 rooms have dropped out of the market due to temporary damage or closure.

It is important to look at October 2017 in the context of how it performed relative to October 2016, which is a weak month due to the aforementioned issues. Most island hotels in October 2017 were open for FEMA and aid workers, but there were very few tourists staying on the island. October 2017 volume exceeded October 2016 by 8%. Due to decreases in supply, occupancy was artificially strengthened to 70.1%.

What is clear from the data is that the demand bump in October was not as significant to top-line performance of the surviving hotels as was the ADR increase. Hotels have been able to push ADR $43 higher than in the prior year.

Puerto Rico outlookHotel markets tend to see a spike in demand and rate directly after a hurricane, due to FEMA, emergency personnel and construction workers. Puerto Rico reflects this phenomenon, even though there are almost 3,000 fewer hotel rooms operating on the island.

After this initial bump, the disaster markets tend to take several years to fully recover to pre-storm levels due to supply constraints, loss of convention and group bookings and stigma. Looking at the market data from catastrophic hurricanes—Hurricane Ivan in Grand Cayman; Hurricane Hugo in Charleston, South Carolina; Hurricane Andrew in Miami; and Hurricane Katrina in New Orleans—it appears that demand took between two and eight years to reach pre-hurricane levels. The outlier was Hugo, which did not follow this pattern. While every storm is different and impacts are unique to the area, level of damage and ability to respond to the recovery, it is evident that catastrophic hurricanes negatively affect long-term hotel market performance.

But on the positive side, major storms provide an opportunity for many properties to pause and perform capital-expenditure projects that might have otherwise taken several years to perform. Several Puerto Rican hotels are scheduled for CapEx projects and restorative enhancements following Irma and Maria. It should be noted that District Live!, a $90-million mixed-use entertainment venue under construction in San Juan’s Convention Center District, was not materially affected. Work resumed after Hurricane Maria, and the project is set for opening in late 2019.

Given the destruction and stigma associated with Irma and Maria’s impact on Puerto Rico and the eastern Caribbean Islands, growth rates to non-affected islands will vary by market. Islands like the Dominican Republic, Jamaica, Grand Cayman and Aruba might see demand from leisure business originally booked for Puerto Rico and the eastern Caribbean. This business will also flow to Florida.

Flooding after the storm in Puerto Rico did not persist, as was the case with Hurricane Katrina in New Orleans or Hurricane Harvey in Houston. Still, many of the hotels and resorts have been damaged and will need significant renovation, while some remain closed indefinitely.

Utility damage—power in particular—is the most pronounced problem facing Puerto Rico. As of 1 December 2017, roughly half of the island was without power, with some 30% of customers still lacking it by the end of January 2018. It will be several months before power is fully restored.

Cruise ships have returned, providing much needed revenue to the island. Many local businesses have taken months to reopen and provide services to the returning tourists, a problem that market participants believe will cause the 2018 winter season to be lost. However, the loss in tourist trade is likely to be substantially offset by the bump from aid and construction workers. Further, the consensus is that it will be a minimum two-year recovery, if there are no other unforeseen conditions.

The monetary size of the recovery effort, the uncertain future of the economy, and the shrinking population base have led to bad publicity for Puerto Rico in the mainland U.S. which accounts for 89% of non-resident tourist arrivals. When the island physically recovers, a strong mainland U.S. marketing campaign welcoming tourists back is needed with a clear message that Puerto Rico is open for business and the warm and welcoming people of Puerto Rico are resilient.

The 2017 hurricane effectPuerto Rico isn’t alone in its hurricane-related struggles of late, and it’s important to note the island is one of several areas impacted by the particularly devastating 2017 hurricane season. Through the year, the Caribbean and mainland U.S saw 17 named storms that include 10 classified hurricanes.

Hurricane Harvey significantly affected Houston with massive flooding, with Moody’s estimating the damage at $81 billion. Many islands in the Caribbean, including Puerto Rico, Dominica, St. Martin, Anguilla, St. Barts, the Turks and Caicos, and the British and U.S. Virgin Islands were ravaged by Hurricanes Irma, Maria and Jose.

While the impacts of Hurricanes Maria and Irma were primarily centered in the Caribbean, mainland United States bore the brunt of Hurricane Harvey’s force. Harvey was the first major hurricane to strike the United States since Hurricane Wilma in 2005.

Houston, in particular, was devastated by Harvey. Despite the devastation to the city and surrounding areas, the hotel and hospitality sector saw a boom in demand. Displaced residents and relief workers sought shelter in hotels in the immediate aftermath of the storm. The figure below shows the year-over-year change in demand for the Texas markets covered by CBRE’s Hotel Horizons for 2017. Demand grew across all markets in Texas; however, the Houston market saw a 47% demand increase over 2016 levels as a result of Hurricane Harvey.

Hurricane Irma made landfall on the U.S. mainland in Cudjoe Key, Florida, as a Category 4 storm, and carved a path up the coast of Florida. Damage to property was not as significant as the effects of Hurricane Harvey, though there was an estimated $50 billion in damage, making the hurricane the costliest in Florida’s history.

Hurricane Irma’s impact on the Florida hotel industry was markedly different than Harvey’s impact in Texas. Many citizens chose to evacuate from the path of the hurricane rather than sheltering in place, so hotels in the most severely affected markets did not see the spike in demand that the hotels in Houston did.

In fact, September saw the greatest decrease in year-over-year hotel demand for 2017 for the Fort Lauderdale (-4.4%) and Miami (-11.2%) markets. These declines were negated the following month as evacuees returned to their homes to rebuild, resulting in double-digit increases in rooms demand compared to October 2016.

Aaron Carone, MAI, MRICS has been a consultant with CBRE Hotels (formerly PKF) since 2015 based in the Jacksonville office. He provides real estate valuations, market/feasibility studies, consulting and market research in the hospitality industry.

Jamie Lane is a senior economist for CBRE Hotels’ Americas Research. He is based in the firm’s Atlanta office where he is responsible for econometric forecasting, producing the firm's quarterly Hotel Horizons® reports, and new product development. Other activities include conducting studies for hotel investment firms and operating companies using advanced quantitative methods and preparing research reports on contemporary hotel industry issues.

The assertions expressed in this article do not necessarily reflect the opinions of Hotel News Now or its parent company, STR and its affiliated companies. Please feel free to comment or contact an editor with any questions or concerns.

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